Odds Favor Correction in 2014, Goldman Sachs Says

By Ben Levisohn

Goldman Sachs (GS) likes U.S. stocks. Its equity strategists, led by David Kostin, think the S&P 500 will end 2014 at 1,900, good for a 6% gain. But it could be a bumpy ride, they say.

Reuters

Kostin and team write:

Drawdown risk rising after 40% rally with no correction: S&P 500 has soared 26% YTD. The median expected drawdown equals 6% in the next three months and 11% during the next 12 months. Drawdowns of these magnitudes from the current level would equate to 1700 and 1600. We estimate a 67% probability of a 10% drawdown at some point in 2014…

We are not forecasting a decline in the index, but providing an estimate of the lowest point it may reach on its way to our future target.

Goldman Sachs, however, does see a pickup in capital spending, which is generally linked to an acceleration in economic growth and and an increase in sales, as companies only start to spend after they see a ” increased activity and demand.” That could benefit companies who aren’t spending much now but have strong returns on invested capital, including Marathon Oil (MRO), ConocoPhillips (COP), and Starbucks (SBUX).

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.